Crypto trading: What every active crypto trader needs to know!
The topic of this article may not be as exciting, but is highly relevant, esp. for active Crypto traders (vs. Forex, etc.) such as #daytraders #scalpers & #swingtraders.
Warning: There will be quite a bit of statistics in this article.
Trading fees are much more relevant to a traders performance than many think…Really? See below
A Crypto scalping trader with 0.5% R per trade has to make 265% return p.a. just to break-even on tradingfees. In other words, the trader pays 133k fees on a $50k account.
The situation is better for traders with less daily trades, but 143% or $72k for the daytrader and 41% or $20.3k for the swingtrader is still something most fund managers dream of as a yearly performance. Well only at an unknown cryptoexchange with high fees?
No, we only considered the Top 15 largest exchanges here. The scalping trader in this example actually has futures maker fees of 0.017% and taker fees of 0.051% and would be trading at #MEXC. Doesn’t seem a lot, but have a look at the effect of leverage:
Our scalping trader risks 0.5% of the balance, so only $250. However, the position size in order to execute the trade is $50,000, so this is what the fees are paid on. Aaaand… fees are paid both on opening AND closing the position, so $100k in total.
Assuming market orders for opening and closing, the fee for the trade add up to 51 USD. Paying $51 on a trade in which you risk $250 seems a lot to me! I don’t want to talk this too bad, just showcase the importance, and we will come to ways on how to prevent it later…
…but let’s first of all have a look at one more metric: Hit rate. You would expect a 50/50 chance of winning or losing a trade if you randomly enter a trade and set your profit goal and max. loss the same number of pips from your entry price (RRR = 1).
However, our scalping trader actually requires a win rate/ hit rate of 60.2% to become profitable TP & SL both at 0.5% of entry price:
39.8 loss trades with each $301 loss
60.2 win trades with each $199 win
=0
What is the probability of 60 hits (50/50 chance assumed)?
Statistics: The probability of 60 wins or more (to be break-even or profitable) is only 2.8%. That’s not a lot, and you really require a strong trading edge to overcome this. However, before getting too negative, let’s have a look what traders can do increase their odds.
First: Reduce trading fees. And there is good news here.
While trading fees are high in crypto vs Forex for example, the differences among exchanges are even higher.
However, there is no one-fit-all rule. Each trader has their own individual volumes, holding, maker %,etc, and depending on the individual style & volume, there is different exchanges in which fees would be optimized.
In fact, we did an analysis of 10 traders, and each of the 10 traders would have a different cheapest exchange (see picture) again only considering the TOP15.
Let’s say the traders would be in a fee optimized scenario, how would the numbers look like then?
The scalping trader could reduce the fees to $39k, the daytrader to 24.4k and the swingtrader to 6.8k. needing only 78%, 49% and 14% in return to breakeven on trading fees respectively. Already much better:) How do you know though which exchange fits you best?
I am glad that you asked!
A little promotion for our fully automated fee analysis. At dr-fee.com, you can just type in your volumes (spot, usd-m & coin-m futures), maker %, balance, etc and we simulate your fees for all major exchanges.
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Btw. #Kraken & #ByBit were the cheapest here in the examples.
How much did the traders previous 2.8% chance of break-even or better improve?
Our scalper trader now only needs a hit rate of 53%, the daytrader 52%, and the swingtrader 51% to break-even. Instead of the previous 2.8% chance, the scalper now has a probability of 30.9% of break-even or better!
Before looking at additional ways to further improve the statistics for active traders, let’s have a look at one more interesting dimension: Assuming the traders were able to break-even in the high fee scenario.
If they now optimize their fees, what’s the effect?
Here comes our best friend in finance and trading: Compounding! The performance improvement would not only be the difference of the required return to break-even, but the compounded rate of those.
Scalper: 550% profit
Daytrader: 154% profit
Swingtrader: 31% profit
With all that being said, if it’s not for the fees, the hit rates and probabilities highlight another very important aspect of trading. That also brings us to our second point what traders can do to increase their odds:
Risk & Money Management!
How so?
You will always be at a slight disadvantage due to fees, so you want the impact of it to be as low as possible. Besides the fee rates, the following other factor influences the required hit rate:
The Return Risk Ratio of your trade (RRR)
If you would win twice as much with a trade compared to what you would lose (RRR = 2), your required hit rate to break-even is only 33%, (RRR = 3 → 25% hit rate required, etc.).
Scalping traders usually don’t have a high RRR, but a high hit rate, but let’s assume for the moment our trader has a RRR of 3 to showcase the effect of RRR in high fee trading markets.
With a RRR of 3, fees of still $51 per trade, and a R of 0.5% or $250:
Win trade: $+699
Loss trade: $-301
Our trader needs 30 out of 100 win trades to be breakeven (without fees 25% would have been sufficient).
If we set the likelihood of a winning trade to 25%, the probability of reaching 30 or more winning trades is 15%!
What does that mean?
In a RRR=1 scenario, the probability of break-even or better incl. fees is 2.8%, while in a RRR=3 scenario incl. the same fees it is 15%.
To increase the odds as a trader in a high fee market, high RRR trades work significantly better compared to low RRR trades.
Btw., if you don’t want to manually calculate those odds which i presented, just use a tool like https://omnicalculator.com/statistics/coin-flip-probability.
Time to wrap-up. This article is not to say active trading in #crypto doesn’t make sense, however it is about knowing the environment you are in and how to navigate in it in order to increase your odds.
Not even mentioned in this thread is the importance of limit orders (e.g. compared to Forex), funding fees vs. rollover fees, etc.
If you have made it until here — Thank you for reading. We would love to hear your thoughts :)
None of the written should be considered financial advice.
